Bloomberg View: Lessons of Corzine's Collapse; Invasion of the Body-Part Market
MF Global and the Un-Bailout
The bankruptcy of MF Global Holdings is the first major U.S. casualty of the European sovereign-debt crisis. The trading firm’s demise is no small matter: Its $40 billion in debt is on the scale of Chrysler’s 2009 failure.
The MF meltdown is also sad news for creditors, shareholders, and almost 3,000 employees, not to mention a humbling blow to Chief Executive Officer Jon S. Corzine, the former Goldman Sachs head, U.S. senator, and New Jersey governor.
Is there anything to be learned from this minicataclysm? Two things, actually.
Lesson No. 1 is that there is no need for—indeed, no one is even suggesting—a bailout. MF Global took large bets on commodities, government debt, futures, and derivatives, and did so with its own capital. No federally insured bank deposits or Federal Reserve discount-window loans were involved. Companies that risk their own money, or that of wealthy clients, should be allowed to fail.
Almost as soon as he arrived in 2010, Corzine set out to make MF Global a junior version of Goldman Sachs by diversifying his new firm, which until then had mostly arranged and processed trades for banks, corporations, and other investors. MF Global, formerly part of Man Group, was founded as a sugar broker by James Man in England in 1783. It was spun off as a public company in 2007.
The financial crisis and economic decline put a dent in trading revenue as investors reduced their risk appetites and generally had less money for trading. So Corzine pumped up the firm’s proprietary trading desk, using its small base of capital to buy European sovereign debt.
To say the least, Corzine’s timing was poor, coming as many Wall Street firms were shrinking proprietary trading desks and reducing their risk. MF Global went in the opposite direction by buying the debt of Italy, Spain, Belgium, Portugal, and Ireland, ignoring warnings of default by one or more of those countries.
The company holds more than $6 billion in euro-area debt, the value of which has since tumbled. It also tried to earn interest off those assets in the overnight repurchase market. To do all this, it borrowed $40 for every $1 in capital, according to Egan-Jones, a rating service. That’s more leverage than Lehman Brothers Holdings had when it collapsed in 2008.
That raises lesson No. 2: Regulators this time didn’t wait for disaster to befall MF Global and its trading partners. The Financial Industry Regulatory Authority, the overseer of trading firms such as MF Global, in September required it to reduce its leverage by setting aside more capital.
The unraveling came quickly. The short-term cash lenders that MF Global depended on began demanding more collateral for their loans. Ratings companies downgraded the firm, with Moody’s Investors Service citing the firm’s “outsized proprietary position.” The firm on Oct. 25 reported a net loss of almost $192 million for the latest quarter, the ninth loss in the past 11 quarters. Once Bloomberg News reported on Oct. 28 that MF Global had tapped out two of its credit lines, the shares plummeted, and the firm was, for all intents, dead.
Because none of these activities took place within a bank, MF Global’s failure is contained within a relatively small circle of owners, lenders, counterparties, and customers. This isn’t to minimize the large and painful losses, but there are no public losses and, so far, little systemic fallout.
How to Get That Kidney? With Incentives
In a world of difference, how’s this for universality? Almost every country has a law prohibiting the sale of vital organs for transplant. You can’t donate a kidney for money, say. The ban extends after death, too: It’s against the law to promise payment to the estate of someone who agrees to donate organs.
The concept of selling body parts is inherently offensive. What’s more, governments are loath to allow the poor to be motivated by financial need to provide vital organs for the wealthy. In the place of legitimate trading of human parts, however, a global black market in kidneys, liver lobes, and other organs has developed and is steadily growing.
What can be done to stop this? One strategy is to increase law enforcement. Israel, where a great number of black-market organs end up, has instituted stiffer prison penalties for people who buy or sell body parts, required hospitals to better scrutinize donations from nonrelatives, and banned insurers from funding transplants performed outside Israel.
But law enforcement alone can’t destroy the black market. Another approach is to encourage more people to donate organs. To this end, in October, a bioethics council in the U.K. recommended that pilot programs be created to test whether more people would be prepared to bequeath their body parts after death if, in return, the government offered to pay their funeral expenses.
This is a smart approach. Covering funeral costs could inspire altruism without actually motivating people who would otherwise not donate to do so for the payoff. Other reasonable enticements have been proposed for “cadaveric donation” of hearts, lungs, livers, pancreases, kidneys, corneas, and other organs for transplant. These include reduced fees on driver’s licenses, payments after death to a charity of the donor’s choice, and allowing donors priority if they themselves need an organ transplant. Israel and Singapore are trying the priority-for-transplant strategy, but it isn’t yet known whether it’s getting more people to agree to donate.
Strategies to encourage donation necessarily vary from country to country because different cultures accept different practices. But simple pleading isn’t enough anywhere. Countries worldwide should look for the best ethical approaches to persuade people to donate their organs.